Eurozone crisis hangs on ECB cash injection

The next turn in the eurozone debt crisis hung on a massive cash injection by the European Central Bank on Wednesday which governments and financial markets hope banks will use to buy bonds.

Stock markets — which had already closed sharply higher on Tuesday as strong US and German economic data plus a successful Spanish debt sale — rose at the start of trading.

London’s benchmark FTSE 100 stock index rose 0.76%, Frankfurt’s DAX 30 jumping 1.22% and in Paris the CAC 40 gaining 0.81%.

Tension on the eurozone bond and interest rate markets has eased sharply in the last two days.
Positive sentiment was being driven by a new measure by the ECB to pump liquidity into the markets, analysts said.

Many eurozone governments are having great difficulty in borrowing money on the bond market, and next year eurozone governments must sell huge amounts of bonds to finance their mountains of debt.

As announced by ECB chief Mario Draghi last week, the central bank is launching its first-ever 36-month refinancing operation, which will effectively make as much funds as banks want available at just 1.0% for a three-year period.

Draghi announced the measure along with a relaxation of the rules regarding the collateral required from banks as guarantees for loans from the central bank and a reduction in the ratio of reserves that banks must hold at ECB, also freeing up much-needed capital.

Analysts said they are forecasting large demand for the eurozone’s longest-ever refinancing operation, with estimates ranging from €100-billion to €500-billion ($131-billion to $655-billion).

The previous record was €442-billion at an auction for one-year funds in June 2009.

In the run-up to the auction, Spanish and Italian bond yields — both for long and short maturities — have declined significantly, pointing to easing tensions, said Berenberg Bank senior economist Christian Schulz.


Spain’s 10-year sovereign yield fell below 5.0% for the first time since October, while Italy’s has fallen by 0.75% point to 6.5% since last week.

And yields had dropped even more at the shorter end of maturities, Schulz said.
“The auction is driving positive sentiment,” the analyst said.

“Banks may be acquiring eligible collateral ahead of the auction, driving down yields. They may even use some of the extra liquidity from the auction for further purchases of government bonds and step up real economy lending, locking in low refinancing costs.”

Analysts at Moneycorp said there was “high excitement” about the auction, which was effectively offering banks as much free money as they wanted.

Ostensibly, the purpose was to avoid a credit crunch resulting from banks’ reluctance to lend to one another.

“However there is a suspicion, even an expectation, that banks will load up with three-year money at 1.0% and lob it into three-year Italian government bonds at 5.0% or whatever,” the analysts said.

In contrast to previous long-term financing operations have seen only modest demand, recently, the brand-new three-year operation was different because it would introduce longer-term funding certainty, said Schulz at Berenberg Bank.

“In addition, several governments have put pressure on banks to use the ECB funds to buy sovereign debt, removing some of the stigma. Due to the interlinkage between banks and their governments, banks could potentially save themselves by saving their sovereigns,” he said.

The ECB has consistently refused to act as the lender of last resort to the governments, insisting it was up to countries to get their finances in order.

“But it does take this role very seriously for the banks. If the banks form a kind of cartel and extend that help to the governments, the ECB might be helping sovereigns indirectly,” Schulz said.

This was “just what the doctor ordered,” said Commerzbank analyst Rainer Guntermann, who predicted “bond participation” from banks in the tender as they shift out of shorter-dated refinancing operations to the long-term offer.

“The overriding question today is how much banks will demand from the ECB,” said LBBW analyst Ralph Herre.

“If the operation manages to calm tensions on the interbank markets, the yields could fall on sovereign debt in the medium term. The euro could also benefit and rise,” the analyst suggested. — AFP

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Simon Morgan
Guest Author
Advertising

ConCourt settles the law on the public protector and interim...

The Constitutional Court said it welcomed robust debate but criticised the populist rhetoric in the battle between Busisiwe Mkhwebane and Minister Pravin Gordhan

Small towns not ready for level 3

Officials in Beaufort West, which is on a route that links the Cape with the rest of the country, are worried relaxed lockdown regulations mean residents are now at risk of contracting Covid-19
Advertising

Press Releases

Covid-19 and Back to School Webinar

If our educators can take care of themselves, they can take care of the children they teach

5G technology is the future

Besides a healthcare problem Covid-19 is also a data issue and 5G technology, with its lightning speed, can help to curb its spread

JTI off to court for tobacco ban: Government not listening to industry or consumers

The tobacco ban places 109 000 jobs and 179 000 wholesalers and retailers at risk — including the livelihood of emerging farmers

Holistic Financial Planning for Professionals Webinar

Our lives are constantly in flux, so it makes sense that your financial planning must be reviewed frequently — preferably on an annual basis

Undeterred by Covid-19 pandemic, China and Africa hold hands, building a community of a shared future for mankind

It is clear that building a community with a shared future for all mankind has become a more pressing task than ever before

Wills, Estate Administration and Succession Planning Webinar

Capital Legacy has had no slowdown in lockdown regarding turnaround with clients, in storing or retrieving wills and in answering their questions

Call for Expression of Interest: Training supply and needs assessment to support the energy transition in South Africa

GIZ invites eligible and professional companies with local presence in South Africa to participate in this tender to support the energy transition

Obituary: Mohammed Tikly

His legacy will live on in the vision he shared for a brighter more socially just future, in which racism and discrimination are things of the past

The best local and international journalism

handpicked and in your inbox every weekday